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2023 Q1 Earnings Season Likely to Reflect Continued Margin Pressures
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Note: The following is an excerpt from this week’s Earnings Trends report. You can access the full report that contains detailed historical actual and estimates for the current and following periods, please click here>>>
Here are the key points:
Total S&P 500 earnings for 2023 Q1 are expected to be down -10% from the same period last year on +1.7% higher revenues. This would follow the -5.4% decline in the preceding period’s earnings (2022 Q4) on +5.9% higher revenues.
2023 Q1 will be the 5th consecutive quarter of declining year-over-year net margins, with S&P 500 net margins expected to compress 147 basis points from the year-earlier level. If Q1 margins do decline by this much, this will be the biggest decline since the 138 bps decline in 2022 Q4.
Net margins are expected to be below the year-earlier level for 12 of the 16 Zacks sectors in Q1, with the biggest declines in the Basic Materials (-425 bps), Construction (-402 bps), Tech (-323 bps), Medical (-299 bps), Business Services (-190 bps) and Cons. Staples (-145 bps).
Sectors expected to experience margin expansion in Q1 include Transportation (+195 bps), Energy (+156 bps), Aerospace (+34 bps), and Cons. Disc. (+7 bps).
As has been the case in recent quarters, estimates for 2023 Q1 came down as the quarter got underway. But while the trend of negative estimate revisions remains unchanged, the magnitude of cuts to Q1 estimates is relatively modest compared to what we saw in the comparable periods for the preceding two quarters. That said, estimates have come down across the board for most sectors.
The Finance sector, which dominates the initial phase of each reporting cycle, enjoyed modest upward revisions to estimates in the first two months of the quarter, but estimates started to come down as the regional banking crisis took hold following the Silicon Valley Bank episode.
The Finance sector as a whole is expected to show +0.3% earnings growth in Q1 on +6.6% higher revenues, which would follow the -17.1% earnings decline on +3.7% higher revenues in 2022 Q4.
The Major Banks industry, which includes JPMorgan (JPM - Free Report) and Citigroup (C - Free Report) that will kick-start the Q1 reporting cycle for the group this week, is expected to bring in +3.3% more earnings in the period on +12.4% higher revenues. The table below shows the Q1 earnings and revenue expectations for the Finance sector’s constituent industries.
Image Source: Zacks Investment Research
Q1 Earnings estimates for JPMorgan and Citigroup haven’t changed much, with the current $3.42 EPS estimate down a hair from $3.44 on March 17th but unchanged from where it stood on January 13th. For full-year 2023, the Zacks Consensus EPS Estimate has only modestly come down over the past year.
As with JPMorgan, Q1 estimates for Citigroup haven’t come down much. But full-year 2023 estimates have declined more notably for Citigroup, as the chart below shows.
Image Source: Zacks Investment Research
Q1 earnings estimates for First Republic , which reports results on April 24th, have literally fallen off the cliff, as the chart below shows.
Image Source: Zacks Investment Research
The First Republic example is by no means representative of the broader regional banks space, but it does go on to show that the profitability picture for parts of the regional banks industry has really taken a hit in the wake of the Silicon Valley development.
The big money-center banks like JPMorgan and Citigroup will enjoy strong net-interest income growth as a result of growing loan portfolios and expanded margins. But those gains will mostly get offset by weakness in investment banking and other fee activities. Credit quality still remains favorable by historical standards, though delinquencies are bound to increase as the economic cycle turns down. Some of that will show up in provisions for loan losses in these quarterly reports, as we did in the preceding quarterly reporting cycle.
The Earnings Big Picture
The chart below shows the evolution of aggregate earnings estimates for 2023 since the start of 2022.
Image Source: Zacks Investment Research
As noted earlier, the current aggregate earnings total for the index approximates to an index ‘EPS’ of $213.51, down from $242.98 in mid-April, 2022.
The chart below tracks these index ‘EPS’ values since the start of 2022. Please note that these ‘EPS’ values are imputed approximations and have been previously published on the dates listed in the chart below.
Image Source: Zacks Investment Research
The chart below provides a big-picture view of earnings on a quarterly basis. The growth rate for Q4 is on a blended basis, where the actual reports that have come out are combined with estimates for the still-to-come companies.
Image Source: Zacks Investment Research
The chart below shows the overall earnings picture on an annual basis.
Image Source: Zacks Investment Research
As mentioned earlier, 2023 aggregate earnings estimates on an ex-Energy basis are already down by more than -14% since mid-April 2022. Perhaps there will be some more downward adjustments to estimates over the coming weeks as companies report Q1 results and provide guidance for the coming quarters. But it is factually inaccurate to claim that 2023 earnings estimates have not fallen much.
The only scenario in which the more than -14% cut to 2023 earnings estimates may be called inadequate would be if the U.S. economy were headed toward a significant economic downturn. The risk of such a ‘hard landing’ for the U.S. economy can’t be ruled out, but it is not our base case.
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2023 Q1 Earnings Season Likely to Reflect Continued Margin Pressures
Note: The following is an excerpt from this week’s Earnings Trends report. You can access the full report that contains detailed historical actual and estimates for the current and following periods, please click here>>>
Here are the key points:
As has been the case in recent quarters, estimates for 2023 Q1 came down as the quarter got underway. But while the trend of negative estimate revisions remains unchanged, the magnitude of cuts to Q1 estimates is relatively modest compared to what we saw in the comparable periods for the preceding two quarters. That said, estimates have come down across the board for most sectors.
The Finance sector, which dominates the initial phase of each reporting cycle, enjoyed modest upward revisions to estimates in the first two months of the quarter, but estimates started to come down as the regional banking crisis took hold following the Silicon Valley Bank episode.
The Finance sector as a whole is expected to show +0.3% earnings growth in Q1 on +6.6% higher revenues, which would follow the -17.1% earnings decline on +3.7% higher revenues in 2022 Q4.
The Major Banks industry, which includes JPMorgan (JPM - Free Report) and Citigroup (C - Free Report) that will kick-start the Q1 reporting cycle for the group this week, is expected to bring in +3.3% more earnings in the period on +12.4% higher revenues. The table below shows the Q1 earnings and revenue expectations for the Finance sector’s constituent industries.
Image Source: Zacks Investment Research
Q1 Earnings estimates for JPMorgan and Citigroup haven’t changed much, with the current $3.42 EPS estimate down a hair from $3.44 on March 17th but unchanged from where it stood on January 13th. For full-year 2023, the Zacks Consensus EPS Estimate has only modestly come down over the past year.
As with JPMorgan, Q1 estimates for Citigroup haven’t come down much. But full-year 2023 estimates have declined more notably for Citigroup, as the chart below shows.
Image Source: Zacks Investment Research
Q1 earnings estimates for First Republic , which reports results on April 24th, have literally fallen off the cliff, as the chart below shows.
Image Source: Zacks Investment Research
The First Republic example is by no means representative of the broader regional banks space, but it does go on to show that the profitability picture for parts of the regional banks industry has really taken a hit in the wake of the Silicon Valley development.
The big money-center banks like JPMorgan and Citigroup will enjoy strong net-interest income growth as a result of growing loan portfolios and expanded margins. But those gains will mostly get offset by weakness in investment banking and other fee activities. Credit quality still remains favorable by historical standards, though delinquencies are bound to increase as the economic cycle turns down. Some of that will show up in provisions for loan losses in these quarterly reports, as we did in the preceding quarterly reporting cycle.
The Earnings Big Picture
The chart below shows the evolution of aggregate earnings estimates for 2023 since the start of 2022.
Image Source: Zacks Investment Research
As noted earlier, the current aggregate earnings total for the index approximates to an index ‘EPS’ of $213.51, down from $242.98 in mid-April, 2022.
The chart below tracks these index ‘EPS’ values since the start of 2022. Please note that these ‘EPS’ values are imputed approximations and have been previously published on the dates listed in the chart below.
Image Source: Zacks Investment Research
The chart below provides a big-picture view of earnings on a quarterly basis. The growth rate for Q4 is on a blended basis, where the actual reports that have come out are combined with estimates for the still-to-come companies.
Image Source: Zacks Investment Research
The chart below shows the overall earnings picture on an annual basis.
Image Source: Zacks Investment Research
As mentioned earlier, 2023 aggregate earnings estimates on an ex-Energy basis are already down by more than -14% since mid-April 2022. Perhaps there will be some more downward adjustments to estimates over the coming weeks as companies report Q1 results and provide guidance for the coming quarters. But it is factually inaccurate to claim that 2023 earnings estimates have not fallen much.
The only scenario in which the more than -14% cut to 2023 earnings estimates may be called inadequate would be if the U.S. economy were headed toward a significant economic downturn. The risk of such a ‘hard landing’ for the U.S. economy can’t be ruled out, but it is not our base case.